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Solitron and mis-management shenanigans

When you were a kid what would happen when your parent asked you to do something reasonable and instead of obeying you looked them in the eyes and said "No, you're worthless, I'm not listening to you, I'm doing my own thing"? Maybe yelled at, scolded, spanked, or for the younger set given a 'time-out' or told to sit in a 'naughty seat'. Those are expected outcomes. Across societies respecting elders and parents is expected behavior. Unfortunately in the real world when the elder is a shareholder, the legal owner of the company, management suddenly loses respect.

I've discussed Solitron Devices (SODI) at length on this blog in the past. A Google search reveals 101 references, see here for yourself. The back of the napkin summary is they are a small electronics manufacturing company selling at a discount to almost anything with stubborn management. I first discovered them as a net-net. I ended up getting somewhat engaged with the company talking to management and trying to convince them to pay a dividend. I also helped rally shareholders into forcing the company to hold a legally required annual meeting in 2013.

Solitron is like many public companies, they have a very valuable asset and then something either masking it or blocking that asset from realizing its full potential. Solitron has a slightly valuable operating business and a pile of cash stuffed into Treasury notes. The company could easily pay out the majority of their market cap as a dividend without having any effect on their day-to-day operations. Yet the company won't.

Even though shareholders legally own a company there is a problem in America with publicly held companies. Common men and women when promoted to the highest office of a company suddenly forget shareholders exist and start to believe the company is theirs. Just because someone holds a given title doesn't mean they can usurp the legal rights of shareholders.

Tim Eriksen of Eriksen Capital Management wrote a letter to Solitron management that was filed with the SEC today. The letter summarizes how many shareholders feel. Shareholders voted out directors only to see company management reinstate them. The directors that shareholders (the owners) deemed unsatisfactory by a large margin are somehow acceptable to management. To me this speaks volumes about the quality of Solitron's management. The truth is Solitron doesn't really have management in a plural term, they have a sort of dictator leader named Shevach Saraf. He claims almost all important titles to himself and appears to be a one man show running the place. It's Saraf's way or the highway.

I am clearly frustrated with the company and in some ways disgusted. The fact that Saraf has the audacity to completely ignore shareholders shows his opinion of us. What Saraf doesn't realize is that while he's a kid bragging about the size of his castle on shareholder beach the shareholders are the ones with the bulldozer. And it's time to fire that thing up and use it.

In the past I've advocated voting out Board members but keeping Saraf. I'm changing my position, Saraf needs to go. He needs to go peacefully or forcefully. He only owns 30% of the company, and most of the other 70% is well represented among my readers. It's time to vote him out and when he fails to leave force him out through the courts if necessary.

If shareholders acted as childishly as Saraf we'd be booking flights to Florida to TP and egg the company's headquarters. But shareholders are respectful, unlike Saraf. We've tried to assert our control through legal means only to be ignored. I think it's time to step up the pressure.

"As a reminder, the company had improperly, and as far as I can tell illegally, neglected to hold an annual meeting for over ten years. Finally a shareholder filed suit, which led to the board holding an annual meeting in 2013. At that meeting, shareholders rejected two of the company’s four board nominees. Management responded by reappointing one of those nominees anyway. At the 2014 annual meeting, shareholders rejected the board’s sole nominee. How often does a board lose uncontested elections? After the 2014 meeting some of Solitron’s larger shareholders reached out to the company and submitted potential candidates. The board ignored them all."

"To add further insult to injury, on November 26, 2014 CEO/President/CFO/Treasurer/Board Chairman Shevach Saraf certified an inaccurate filing with OTC Markets. In that filing he neglected to include Eriksen Capital Management among the list of 5% shareholders. Eriksen Capital Management had filed a 13D with the SEC more than three months prior, on August 7, 2014. How was Mr. Saraf unaware of who the owners of the company were? It takes less than a minute to find the information on the SEC Edgar website."

"What is obvious is that there is a board problem and a management problem at Solitron. Instead of using your time and energy to try and entrench yourself, we think management and the Board should meet with large shareholders and work to improve the company’s future. To that end we intend to submit proposals for the 2015 annual meeting to:

1. approve an amendment to declassify the board of directors, 2. to nominate two directors in opposition to Solitron’s two nominees, 3. to increase the board size to seven directors, 4. to elect additional directors to fill the newly created directorships, and 5. to repeal any and all changes to the bylaws subsequent to the date of this letter, up through the time of the annual meeting."
Disclosure: Long SODI

I own a few shares of this. While I agree that management sucks, I think some caution is warranted. I doubt Shalaf is being completely irrational. How many times have activist investors come in, initiated a one-time dividend or tender offer, and then seen the business go to shit (Blockbuster, for example)? I'd like to see the excess cash distributed to the shareholders in connection with a sale of the operating company.

The point Tim makes about the reappointment of the director in 2013 is a bit disingenuous. Here's a post he made on the CoBF board:

"I asked why the board appointed Davis as director after he had been voted down. They said that some shareholders after the meeting got to know Davis's background and regretted their vote. Having talked to him, I can see that."

Saraf is completely rational. He is doing everything possible to maintain control even though the majority do not support him. I would note, that the business has made money 18 out of the last 19 years so I think it could be considered stable. They get to charge cost plus for much of their defense work. One option is a sale (but they would get nothing for the NOLs but a better outcome than the status quo), they could pay a dividend (also better than the current situation), but the best route is full use of NOLs via acquisition, then once used a sale could be considered.

My point about the director was not disingenuous at all. My point was only in comparison to the other directors. He does bring more to the table in terms of industry knowledge, and I can see why management did it but it still should not have been done. He was also one of two people on the Nominating Committee that chose to add Mr. Chiste.

Reminds me a little of MVC Capital, a BDC at about a 35% discount to NAV. Pays a dividend that it doesn't earn and has had slow but steady write downs of assets in recent years. Definitely a melting ice cube.